the Investment column: Stiff competition for Energis

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The Independent Online
ENERGIS'S PROMOTIONAL brochure has five mission statements. The last - by implication the most important - is "every business must remain profitable and control its costs". Energis, however, is yet to enter profitability itself.

That is quite common for many telecoms companies, as is its dedicated Internet arm, Planet Online. Investor hunger for telecoms and Internet stocks has driven the shares up from 294p to a high of 1,947p this year. Energis was capitalised yesterday at just under pounds 5bn. This is impressive for a company with no profits. Although Energis is forecast to break even this year, its valuation is starting to look stretched.

The deregulation of national telecommunications markets has destroyed any advantage a company might have in a particular region. Nor can a telecommunications company possess sustainable advantages based on its technology, because the technology is changing so rapidly. Branding and marketing have become more relevant.

Energis's network is built on the back of the national grid, with the latest SDH digital technology. SDH nodes and switches enable Energis to offer cheaper and more reliable connections to the Internet. It also supports bespoke data and voice services, enabling users to listen to e-mail and reply by talking into the phone. Thanks to SDH, Energis is not just a commodity wholesaler, aiming to fill its network with more minutes. Instead traffic is a secondary activity to selling these fancy data services.

Energis has about 4 per cent of the UK business telecoms market, currently worth pounds 7bn but expected to grow to pounds 18bn. However, it is unclear whether it will be able to grab 10 per cent market share.

The costs of infrastructure such as call centres prohibits it from attacking the residential market; it can only ride on the back of third parties such as Freeserve. And although BT and Cable & Wireless are not 100 per cent SDH, they are catching up fast.

Energis's technology and customer service provides a good foundation but reputations take a long time to build. In the long term, Energis is less of a certainty than its rating implies. Indeed, strip out the acquisition revenues and growth looks like it could be slowing down.

Colt Telecom is cited as a possible bidder, but so far it has shown a preference for asset-sharing arrangements with other telecom companies.

At Dresdner Kleinwort Benson's forecast of pounds 95m earnings before interest, tax and depreciation this year and pounds 155m next year, the shares are looking expensive.